West prepares sanctions as Russia presses on with Crimea takeover

SEVASTOPOL/DONETSK, Ukraine (Reuters) - Dozens of Russians linked to Russia's gradual takeover of Crimea could face U.S. and EU travel bans and asset freezes on Monday, after six hours of crisis talks between Washington and Moscow ended with both sides still far apart.

Moscow shipped more troops and armor into Crimea on Friday and repeated its threat to invade other parts of Ukraine in response to violence in Donetsk on Thursday night despite Western demands to pull back.

EU diplomats will choose from a long list of 120-130 possible Russian targets for sanctions on Sunday, as pro-Moscow authorities who have taken power in Crimea hold a vote to join Russia in the worst East-West confrontation since the Cold War.

Several diplomats dismissed a German newspaper report that said the list would include the heads of Russia's two biggest companies, energy giants Gazprom and Rosneft.

U.S. Secretary of State John Kerry said Russia would be guilty of a backdoor annexation of Crimea if its parliament ratified the Crimea referendum, which is taking place after an armed takeover of Crimea and gives voters no chance to say "no".

He has warned Moscow that U.S. and EU sanctions could be imposed as soon as Monday, although U.S. officials said after Kerry's marathon meeting with Russian Foreign Minister Sergei Lavrov in London on Friday the door was still open for more talks.

Lavrov played down his own ministry's threats, saying Moscow had no plans to invade Russian-speaking eastern Ukraine, where pro-Moscow groups have occupied some government buildings.

But he said Russia would respect the referendum result. Preliminary partial results are expected late on Sunday, with final results on Tuesday.

STOCK MARKET FALLS

Russia's stock markets tumbled and the cost of insuring its debt soared on the last day of trading before the Crimea vote. Brent crude oil rose by more than $1 as traders worried the crisis was set to escalate.

Foreign holdings of U.S. Treasuries have also plunged this week, leading some traders to speculate Russia has cut its dollar reserves to support the ruble and avoid any sanctions.

An EU diplomat said he expected the final list of those who could be sanctioned on Monday to be between "tens and scores" of people from the list, which runs to five pages.

Germany's Bild newspaper reported that Alexei Miller, boss of natural gas monopoly Gazprom, and Igor Sechin, head of Russia's biggest oil firm, Rosneft, would be among those targeted, along with senior ministers and Kremlin aides.

Reuters was not immediately able to confirm the Bild report and European diplomats said the choice had not yet been made and was unlikely to include business leaders.

"(Business interests) is not the target initially, the focus is on the political decision that has been taken to act in Crimea and destabilize Ukraine," said one diplomat involved in the negotiations.

Rosneft spokesman Mikhail Leontyev said sanctions on his firm's boss would be "stupid, petty and obvious sabotage of themselves most of all. I think it will primarily affect Rosneft's business partners in the West in an extraordinary way." Gazprom and the Kremlin declined to comment.

FELLOW CITIZENS

A U.N. Security Council resolution drafted by the United States declaring that the referendum "can have no validity" will be put to a vote on Saturday. Russia is expected to veto it but Western diplomats hope China will isolate Moscow by abstaining.

Kerry told Lavrov Russia should explain its intentions for the large number of Russian forces massing on the eastern border with Ukraine, where many ethnic Russians live, and in Crimea.

The Russian Foreign Ministry, responding to the death of at least one protester in Ukraine's eastern city of Donetsk, repeated President Vladimir Putin's declaration of the right to invade to protect Russian citizens and "compatriots".

"Russia is aware of its responsibility for the lives of compatriots and fellow citizens in Ukraine and reserves the right to take people under its protection," it said, alluding to what it says are threats from Ukraine's new pro-Western leaders.

Ukrainian health authorities say one 22-year-old man was stabbed to death and at least 15 others were being treated in hospital after clashes in Donetsk, the mainly Russian-speaking home city of Ukraine's ousted President Viktor Yanukovich.

Organizers of the anti-Moscow demonstration said the dead man was from their group and the new pro-Western governor of Donetsk said Russians were behind the clashes.

Moscow denies that its forces are intervening in Crimea, an assertion Washington ridicules as "Putin's fiction". Journalists have seen Russian forces operating openly in their thousands over the past two weeks, driving in armored columns of vehicles with Russian license plates and identifying themselves to besieged Ukrainian troops as members of Russia's armed forces.

A Reuters reporter watched a Russian warship unload trucks, troops and at least one armored personnel carrier at Kazachaya bay near Sevastopol on Friday morning. Trucks drove off a ramp from the Yamal 156, a large landing ship that can carry more than 300 troops and up to a dozen APCs.

In nearby Simferopol, around 300 Tatars protested against the referendum. Tatars, a majority in Crimea until Soviet leader Josef Stalin deported them en masse for alleged collaboration with the Nazis in World War Two, are strongly anti-Russian.

FACTS ON THE GROUND

Russian troops seized the Black Sea peninsula two weeks ago as a pro-Moscow regional government took power there. The new regional authorities intend to secede from Ukraine and join Russia in a vote described in the West as illegal.

Putin declared on March 1 that Russia had the right to invade its neighbor, a week after its ally Yanukovich fled the Ukrainian capital following three months of demonstrations that ended with about 100 people killed in the final days.

The Defense Ministry said on Friday it would hold exercises with fighter jets and helicopters over the Mediterranean sea. On Thursday it announced artillery drills near Ukraine's border.

U.S. and EU sanctions on Russian officials and other figures are now seen as inevitable. A formal EU decision to impose sanctions will be taken on Monday unless Moscow rapidly changes course.

U.S. and European officials say the targets will not include Putin or Lavrov, and an east European diplomat said the EU might impose sanctions on one set of people on Monday, and add others on Wednesday and during an EU summit on Thursday and Friday.

"It could start by sanctioning those directly involved with the situation in Crimea. Then if Russia doesn't respond, expand to include senior figures in the Russian Senate, and then ultimately expand to include very senior people," the diplomat said.

Russia's MICEX stock index has lost more than 16 percent of its value in the two weeks since Putin declared his right to invade. The cost of insuring Russia's debt against default is now up by half since the crisis began.

Although Russian public opinion, fed by overwhelmingly state-controlled media, is still solidly behind the plan to annex Crimea, Western countries believe sanctions could undermine support for Putin among the wealthy elite.

Former Finance Minister Alexei Kudrin told Russian media that the threat of Western sanctions was already imposing higher borrowing costs on Russian businesses and that further sanctions would push capital flight to $50 billion a quarter.

Renaissance Capital estimated capital outflow in the first quarter would exceed $55 billion, compared with $63 billion for the whole of 2013.

The ruble has declined only slightly despite the fall in share prices, held aloft by a central bank that raised its lending rates on March 3 and has been spending reserves to keep the currency from falling.

(Writing by Peter Graff and Philippa Fletcher; Editing by Will Waterman, Giles Elgood and Sonya Hepinstall)